Archive for Finances

By Shawn Weber, CLS-F and Mark Hill, CFP, CDFA

The impact of a divorce, especially a gray divorce, can be amplified and made more complex in a recession.

The headlines are troubling. Donald Trump’s escalating trade war with China, no signs of a Brexit deal in Europe and unrest in Hong Kong are all making the world’s stock markets nervous. Global gross domestic product is falling, and recession fears are rising as we approach what will be the first economic downturn since the Great Recession of 2009 in the next 18 months.

Interest rates are sending an early warning. Ever since the U.S. two-year/ten-year yield curve inverted on August 14, the news media are a flutter about a possible looming recession. Every recent recession has been accurately preceded by this economic milestone.

Many knowledgeable financial experts believe we are heading for a recession. There’s some disagreement about timing, but there is consensus our economy behaves cyclically.

We’ve been enjoying an unusually long ten-year economic expansion. Things have been going great, but eventually the law of gravity applies and what goes up comes down. Markets periodically correct. It’s not a question of whether a recession is in our future, it’s a question of when and how deep it will be.

Family law professionals witnessed the devastating effects of the Great Recession on clients. While an upcoming recession is unlikely to be as staggeringly awful as in 2009, there are some important lessons for people considering a divorce in the near future.

Ifyou fall into the “Grey Divorce” category (people choosing to end their marriage in their 50s or later), you could be even more vulnerable and need to pay extra attention. If you have created retirement portfolios and diligently invested, assumptions by you and your financial advisors regarding future returns and safe withdrawal rates may suddenly no longer be valid.

What Is Your Divorce Recession Risk?

If you own a business, a recession could have a significant impact on you and your family, especially if a divorce is on the horizon.

For people considering a divorce in uncertain financial times, understanding what happened in the last recession can inform your decision now.

Do you own a business? You have significant reason to be concerned. The 2009 experience showed us how recession can impact divorce decisions in two major areas: falling prices and declining income.

Falling Prices

Things that can go down in value include real estate, retirement accounts, stock accounts and business assets. When your assets decline in value, it impacts your divorce decisions. There simply will not be as much money to divide.

Declining Business Value: Are You Vulnerable?

Is your business safe? Don’t answer too quickly.

In the last recession, people in the real estate and banking fields were shocked to be laid off. Next time, we see the potential for another round of U.S. business failures. It all comes down to too much debt. Since interest rates have been at historically low levels for a decade, and since banks like to lend in the good times, many businesses have become overleveraged.

The debt amassed in recent years is staggering, but even in today’s strong economy about 20 percent of U.S. companies still cannot make their loan interest payments from cashflow. The only way they can pay their interest is to constantly refinance. In a recession, this situation worsens, putting as many as another 20 percent of companies at risk. What happens if your sales drop in a recession, and you can’t get a loan to tide you over? Your company may not be as solid as you believe.

During the Great Recession, banks were not lending money. They were even pulling existing loans, creating chaos for corporate finances. Banks are happy to lend money in good times, but in bad times they can get quite stingy with their lending. We could easily end up with nearly half of all American businesses having difficulty borrowing and unable to make loan payments. If they cannot borrow money to keep the doors open, they will go belly-up. By “they,” we could mean YOU.

Businesses of all sizes were devastated by the actions of their bankers in 2009. Companies failed, and workers were fired. In addition, many self-employed people who once ran strong, profitable businesses found they had nothing left.

In the next recession, we predict that the most vulnerable businesses will be those heavily involved in imports and exports, or in high technology. Trade wars create uncertainty which restricts buying and selling activity. With tech businesses, we are doing what America has a habit of doing: turning our heroes into goats.

How Healthy Are Your Retirement Assets?

Many people are not aware how vulnerable their retirement assets are to drops in the stock and bond markets. If the market loses value, your retirement assets lose value.

In an impending divorce, you need to assess whether your retirement plans can survive a recession. We believe you face the greatest risk if your portfolio is heavily exposed to technology companies, and businesses involved in import/export activities. Tip: if you own stock mutual funds, you are exposed.

Watch For Falling Real Estate Prices

Recent strength in the real estate market should not blind people to the reality of dropping prices. Current market strength is a result of the incredible low interest rates available. Although experts predict interest rates will remain low, even modestly higher rates can make real estate unattractive or even unaffordable. Many marriages have a significant amount of their net worth in the family home. When prices fall, there is less to divide, and sometimes not enough to live on.

Are Your Financial Assets in the Recession Crosshairs?

In a recession, nearly anything can happen.

In a recession, anything you own can decline in value. In some cases, property you count on selling and dividing in a divorce settlement won’t sell at any price you can accept. If your assets or employment are vulnerable to market forces, you may want to reconsider the timing of your looming divorce.

Loss of Income and Cash Flow

Are you vulnerable to a loss of cash flow due to recession?

Typically, recessions mess with people’s ability to pay their bills. With recession and divorce, people lose their liquidity in two key ways: loss of financing and loss of income. Additionally, when people already overspend, a loss of income or financing makes life all that much harder.

Preparing For A Loss of Access to Financing

In the last recession, banks became unwilling to make loans, including real estate and business loans. Consider BEFORE a recession hits whether to borrow money now while lending is available. In 2009, we advised clients to pull money from their line of credit before the bank cancelled the line. It was good advice, because the clients were able to ensure they had cash before it became inaccessible.

What If Your Income Drops?

Consider carefully whether your business or your employer could be in the crosshairs. In the upcoming recession, the most vulnerable businesses will be those involved in the tech industry, manufacturing, farming or retail. Remember, if it costs more money to bring in or send out from the United States, manufacturers who rely on foreign trade will suffer and jobs will be lost.

Can You Handle a Change In Your Current Lifestyle?

If you enjoy spending money on luxury items to maintain a lavish lifestyle, it could come to a screeching halt in a recession – especially if a divorce is involved.

Many of our wealthier clients suffer from “affluenza.” People are feeling flush, consuming more and saving less. A recession will likely reduce income for many of these people. Costs will increase due to ongoing trade wars.

After a divorce, both clients will consume more. Two households cost more to maintain than one. When there is less money to go around and things cost more, families with higher spending patterns are hit much harder.

How will you balance your own needs together with the needs of your children? Will you be able to afford expensive activities for the kids like riding lessons or club sports? Something will have to give. How can you best prepare now?

A nationally-recognized speaker on the financial aspects of divorce, Mark Hill is the founder of Pacific Divorce Management.

With nearly 40 years as a financial planner and the last 20 years specializing in divorce, Mark is a wizard at cutting through the complication of the divorce finances. Mark is a luminary in the Collaborative Practice movement and brings his unique blend of financial expertise and dispute resolution skills to even the toughest divorce situations.

Pacific Divorce Management educates and provides guidance so divorcing couples can make informed decisions without feeling insecure about the consequences of those decisions. They gather, organize and evaluate the data and then tailor services to the clients’ needs.

At Weber Dispute Resolution, we love teaming up with Pacific Divorce Management to bring our clients superb financial advice for a secure future. To learn more about how Mark Hill and Pacific Divorce Management can help you with your divorce case, visit PacDivorce.com or give Mark a call at 858-257-4612.

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If another recession is looming in 2019, it could greatly affect decision making during a divorce.

It has been nearly a decade since the Great Recession. Since then, the U.S. economy has rebounded and then some. Unemployment is at record low levels, and people were finally starting to breathe easier about their financial circumstances.

But economists will tell you that recessions are cyclical and follow periods of strong growth, like the one we have recently enjoyed. It is likely another recession looms ahead. It could be mild or it could be more serious.

During the last recession, so many couples came to my office making decisions about their divorce to try and avoid financial hardships. Divorces during a recession can be different. Here are some thoughts based on my experiences.

Financial Strains Make Decisions for Divorce During a Recession More Difficult

Unemployment puts a tremendous strain on any marriage. Often it was the catalyst or the “final straw” and divorce was the result. Divorce itself is financial straining. Add a recession to the mix, and the circumstances were catastrophic for everyone.

First, homes and other real estate had lost value. It meant in many cases couple had negative equity – they owed more than their real estate was worth. Sometimes people could afford a buy out allowing them to keep the house if credit was available. But in the last recession, banks became stingy about lending. People simply could not get loans to refinance the house.

So there were many couples who made the decision to defer sales—meaning they co-owned their real estate until a later time. Divorcing couples might even choose to live together in the family home even after legally divorcing, because there was no other option without losing money on the sale.

If a couple couldn’t make any of these options work. the alternative was to sell the home in a bad market. When this was the last resort, there were many short sales.

Others suffered from foreclosures on their property. Often bankruptcy wasn’t far behind.

Kids Take A Financial Hit

Couples would disenroll their kids from private schools, or take them out of expensive extracurricular programs like sports or music to save costs.

Health insurance was a big deal. If a spouse lost work and lost health insurance coverage from their former employer, couples might end up bearing the cost on their own, putting strain on their family. Sometimes a spouse in the role of full-time parent was counting on healthcare coverage from the working spouse. But after a divorce during a recession, they would face being cut off.

People who divorced prior to the recession suddenly found themselves unable to pay their monthly support payments, and would fall behind. The ex-spouse and the kids suffered from losing the income. Tensions would flare and fights over money would affect co-parenting relationships.

Gray Divorce Offers Unique Financial Issues

For divorcing couples close to retirement, which started being referred to as “grey divorces,” their retirement accounts including IRAs and 401(k)s tanked right before they had to count on them for income. This is hard enough when married, but when a couple splits up in their 60s or 70s, the financial hit is devastating. There wasn’t enough time to recover before retiring.

It’s hard to determine whether divorce rates increased or decreased during the last recession. One theory is that financial strains on marriages caused more couples to divorce. But it’s also possible some people chose not to divorce during a recession because they just couldn’t afford it.

Impact of Impending Recession on Your Divorce

It’s my belief recession is inevitable, and not too far off. For couples contemplating divorce during tough financial times, economic decisions will affect many aspects of their lives during a divorce.

Divorce is hard enough on a family. Divorce affected by a financial recession is even worse. If divorce during a recession becomes inevitable, people can lessen the financial burden by pursuing mediation and other no-court options. These options give people the opportunity to divorce for less money. They also allows couples to find creative solutions when dividing financial assets, figuring out ways to pay for their children’s education, or preserving retirement funds.

With the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), the deductibility of alimony or spousal support on federal taxes is set to sunset on December 31, 2018. If you plan to divorce or are in the process of a divorce that will not be completed before the end of 2018, this could cost you a lot of money.

Spousal support used to be deductible under previous law

Under the previous law, spousal support (or alimony) is deductible from income for the support payor and taxable to the support recipient. This let parties save money on Uncle Sam’s dime. Typically, the support payor would be taxed at a higher rate than the support recipient because of the disparity of income. By transferring the tax burden from the support payor to the support recipient, the support payor had higher net spendable income and could afford to pay more. This usually ended up in a win-win circumstance for the parties.

Changes to spousal support deductions under the new 2019 law

Commencing on January 1, 2019, spousal support paid under new orders will not be deductible to the support payor and will not be taxable to the support recipient. This rule will apply to alimony payments required by “divorce or separation instruments” executed after December 31, 2018.

(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(B) a written separation agreement, or

(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.”

Example from a higher income case

In negotiations husband and wife had agreed that spousaI support would be set at $12,000 a month. Because husband will be in the combined 46.3% tax bracket post-divorce, the after-tax cost to him will be $6,444. However because wife will be in the combined 34.3% bracket she will net $7,884 after tax. When the new law is in force and husband can no longer deduct his payment it would cost him $1440 more to get her the same amount of spendable money. The differential will be even greater if wife goes ahead with her plan to buy a condo next year and thus receive the deductions for mortgage interest and property taxes.

Of course the reality of divorce is that there is rarely enough money to go around and the result of this change is going to be that payors will end up paying more and payees will end up receiving less.

An additional impact of this change that we believe is not well understood is that because in California the software that calculates child support uses after-tax income as the input number used for income available for support, child support numbers will also be reduced.

Is your divorce grandfathered into the new 2019 rule? Maybe not!

However, a divorce or separation instruments in place before January 1, 2019, but modified after this date, will remain under the current rules allowing for deductibility. They would only be subject to the TCJA, if the modification expressly provides for the TCJA to apply.

What does this mean for people in the midst of a divorce today? To preserve the possibility of the alimony payment tax deduction, you MUST have a divorce instrument entered by a court before the end of 2018.

Your judgment MUST be entered in 2018 to be deductible.

Although it is unclear exactly how the IRS will interpret this rule, we believe it is crucial that the divorce instrument be entered before the end of the year to preserve deductibility forever (or at least until the rule is changed again).

A huge concern is that the courts are very much behind in the processing of judgments of divorce or legal separation. Time is of the essence. If a couple does not have a completed judgment to submit prior to middle of November 2018, there is a very strong likelihood that it will not be accepted by the court in time. Thus, the parties would lose the benefit of deductibility because there divorce or separation instrument would not be enterd before 2019.

To help parties maximize what they have to spend for themselves and their kids after divorce, Weber Dispute Resolution is teaming up with Pacific Divorce Management to offer an expedited to process.

Pacific Divorce Management, one of the premier advising firms in San Diego for financial issues in divorce, will work with parties to gather financial data to complete the State mandated Declaration of Disclosure Forms.

Weber Dispute Resolution, a leader in divorce mediation and legal dispute resolution, will prepare the necessary forms to open a divorce case and will work hand in glove with Pacific Divorce Management to prepare the necessary divorce or separation instrument necessary to satisfy the IRS requirements for deductibility.

If it is impossible to conclude the entire divorce prior to 2019, the parties could enter into a partial stipulated Judgment for spousal support that would meet the requirements for the alimony deduction. The couple would then have the following options:

Work with Pacific Divorce Management and Weber Dispute Resolution in an out-of-court alternative dispute resolution setting to complete their divorce or legal separation (for example, mediation or collaborative practice).

Work with other professionals in an out-of-court alternative dispute resolution setting to complete their case.

Litigate their divorce or legal separation with other professionals.

Whether you choose to complete your divorce with us or choose to go another way, we want to help all parties involved in a late 2018 divorce be aware of this change, and take advantage of the tax laws for deductibility of spousal support payments before it goes away forever.

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For most couples getting divorced, their children are their single highest priority. Child support and child custody are their immediate concerns. When you go through the court system in California and in other states, the judge applies a formula to determine the amount of child support. Courts consider income as well as the tax effects of the parties’ various income. They then apply the state mandatory child support guidelines. If this decision goes in front of a judge, he or she has to follow the guidelines to the letter. If you do it on your own, there is flexibility to reach a more creative and equitable solution for your unique situation.

What couples don’t often consider are expenses which seem to be a long way off such as the costs of a college education. This can be one of the single most expensive mistakes couples make if it gets overlooked.

College expenses can be something the parties agree on, but the California Family Code does not require this. The Family Code is only concerned about what happens to your minor children until they reach age 18, or are no longer high school students. This is when child support ends.

Courts will not order parents to pay for college unless the parties agree. Most of my clients don’t choose to include orders in their marital settlement agreements relating to payments for college. You can imagine the problems if something goes wrong. What if the time comes, and you can’t afford to pay for college due to unemployment or disability – but you have a court order that says you must pay? If this occurs, your own child might have a legal cause against you. That’s not exactly healthy for family relationships.

Most of my clients opt out of having a college expenses provision included in their divorce decree. Sometimes, the parties agree to contribute to a 529 college savings fund, which has certain tax advantages.

Have a conversation about college funding as part of your divorce

Whatever you decide, it’s important to have a conversation about college funding. Sometimes, this might mean you agree to meet at a future time, closer to your child’s decision about college. The choice of college can be crucial. What if one parent is paying for college, and the other is encouraging the child to go to a private, out-of-state college that’s not necessarily affordable?

Simply because the family court isn’t going to order a couple to do something in the future doesn’t mean the expense isn’t going to come up. Discussing everyone’s individual expectations is crucial. Parents and their children may have different values about the college choice and the college expenses.

We recently worked with divorcing parents who had completely opposite opinions about college financing. One parent said, “I had to work and scrimp and save and take out loans, and I appreciated my college education more for it.” The other parent said, “No, this is our responsibility as parents to take care of our child’s college education.” This is an important conversation they needed to work through.

It’s often helpful to bring in a mental health professional to work with the parents when they have different values about what’s going to happen with college expenses. That’s exactly what we did, and in the end, the parents were able to reach an agreement.

Get expert advice on college expenses from a financial professional

For practical reasons, couples may also want to confer with a financial professional about their financing options. Does it make sense to set up a 529 account? Are loans or grants practical? What can they truly afford? What is the best vehicle to save for college?

Alternative dispute resolution options such as mediation or Collaborative Practice are ideal when divorcing parents need to work through complex financial decisions which may affect their family in the future, even years into the future. As any parent of a college student will tell you, those years pass by much more quickly than you realize. It’s best to talk now and come up with a plan.

Call on Weber Dispute Resolution for help in starting your family’s conversation about making college possible and practical for your children even after divorce.

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What is a Gavron Warning?

What is a Gavron Warning?

The idea of the “Gavron Warning” came from the case In Re Marriage of Gavron, (1988) 203 Cal.App.3d 705, 250 Cal.Rptr. 148. In this case, the parties separated in 1976 after a 25 year marriage. Subsequently, the court ordered the husband to pay $1,100 per month of alimony. He did so until 1981, when he asked the court to reduce support to $550 and then terminate entirely after one year. This initial request was denied.

However, the husband tried again in 1986. This time the court ordered that support would continue for five months and then terminate. The wife appealed and reversed the trial court’s order. The appellate court held that because the wife was not warned in prior orders to become self-sufficient, she could not be penalized years later because the court did not tell her to make efforts. In essence, as the court argued, the failure to focus her on the expectation to become self-sufficient meant that the court could not cut her support now.

Because of this case, the courts will frequently issue a warning to the supported spouse. Here is an example of a Gavron Warning:

“NOTICE: It is the goal of this state that each party will make reasonable good faith efforts to become self-supporting as provided for in Family Code section 4320. The failure to make reasonable good faith efforts may be one of the factors considered by the court as a basis for modifying or terminating spousal or partner support.”

Supporting Spouses will want the Gavron Warning included

So, the lesson for support payers is to make sure that the court includes such language in the spousal support order. If it is not, it may be harder to reduce income later if the supported spouse refuses to make good faith efforts to become self-sufficient. When I am representing a support payer, I always ask the judge for a Gavron Warning and I almost always include it in written stipulations. I will also sometimes simply file and serve a written Gavron Warning to the supported party myself at the beginning of the case so that there is no question that the supported party has been warned.

The supported spouse will likely rather not have the Gavron Warning included, but it is hard to oppose it

When I am representing a supported spouse, naturally I will not bring the Gavron Warning up. However, if opposing counsel wants it in an order, there is no legal basis to resist it. The moral for the supported spouse is not to count on the alimony as a permanent means of support.

I frequently refer the supported spouse for vocational counseling to assist with re-entering a career. I get as much alimony as I can, but encourage the prudence of planning for self-reliance. After all, no one knows for sure what the future holds. Not only could the support payer try to reduce alimony, it could simply terminate by means of death. Any changed circumstance such as unemployment or disability could force a reduction or termination in support too. The best advice is to use the support as a life preserver to stay afloat in the short run, but take steps immediately to be ready for when the support may no longer be available.

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Complicated financial issues can make a divorce seem complicated. Mediation can help you sort out your issues.

One common myth about divorce mediation deserves a debunking: You can’t mediate when there are complicated financial issues. This advice is completely wrong. The opposite is true. The more complex your divorce finances, mediation offers the best way to sort them out without resorting to expensive litigation.

Comparing costly, stressful divorce litigation in court, and the same divorce process using mediation, these are the reasons why mediation can be a better choice for complicated fiancial situations.

Financial disclosure same for mediation as in court

Financial declarations in divorce cases are the same no matter whether you go to court, or pursue alternative dispute resolution.

Additionally, parties can have financial disclosures reviewed by counsel before agreeing to anything. Whether your divorce is simple or you have profoundly complicated financial issues, your divorce process will require full disclosure. There is no difference between mediation and litigation in the level of detail.

Because mediation relies on informal discovery rather than formal and expensive discovery, people actually tend to get more information in mediation than in litigation.

Lawyers know the name of the game when served with discovery in a litigated case is to provide as little information as legally possible. It’s even more the case when there are complicated financial issues. But in a mediation, the information tends to be more forthcomingbecause people are not being forced into tedious formal discovery processes. This may seem counterintuitive, but actually it’s human nature. When people are forced to do things they tend not to cooperate. When things are more voluntary, people are less threatened and more likely to do what they are supposed to do.

Use a neutral financial specialist in mediation

The financial specialist can help gather information when there are complicated financial issues. Sometimes the parties may not know which questions to ask relating to the divorce finances. The financial specialist can help know what questions need to be asked and can also alert parties to red flags. This is especially helpful when the parties are at different levels of knowledge relating to the finances. The financial specialist helps bring people to a level playing field. Reports that the financial specialists produce can be very helpful in uncovering options and finding pathways to settlement.

Mediation lets you be creative with solutions for your divorce finances

Judges must follow the law. The law isn’t flexible. Judges have limited options to offer you. But when people mediate, they are free to create a settlement best for the family.

I have seen many “outside-the-box” settlements in mediation. Most are far better for the family than what a court could ever provide.

Get independent legal and financial advice

There is no risk in mediation. Parties are not required or pressured to enter into any agreements without the option to talk with a lawyer before signing. You can have an agreement reviewed by your own financial professional at any point. This ensures parties are not left to their own devices when considering challenging money questions.

Avoid shark attorneys who discourage mediation

Shark type attorneys will discourage you from mediating. They might tell you court is your only option. Be skeptical. If you have significant assets, they want your case. This serves their interests, not yours. They know they can make a ton more money if they can fight over your financial issues.

Don’t get sucked into a litigated case when you don’t need to. You might believe your case is so difficult, only a judge can sort things out. In today’s family courts, judges do not have the time to spend on complicated details. Those details important to you can be lost. A skilled mediator can handle any issue you present. Mediators take all the time you need to be sure you address and resolve each detail to your satisfaction.

Make sure your mediator possesses the training and experience necessary. When things get complicated, he or she should be willing to bring in additional experts. Ask whether he or she has worked with couples in circumstances similar to yours. Your mediator should be able to offer examples. Don’t work with someone getting on the job training during your case.

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Faster Scheduling: Don’t wait for the Court to schedule your mandatory settlement conference months from now. Get a date now!

Enough time: With a private settlement conference, you can schedule enough time to settle your case without feeling rushed.

Pick your neutral: With a private settlement conference, you have the power to select your neutral instead of relying on the crapshoot of random assignment. Your neutral will be a known quantity with years of experience in dispute resolution.

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About Weber Dispute Resolution Weber Dispute Resolution, is proud to represent clients in San Diego, Solana Beach, La Jolla, Rancho Santa Fe, Del Mar, Encinitas, Carlsbad, Vista and throughout the surrounding cities of San Diego County, including the South Bay, North County and East County in California.